2015-07-20

Why We Will Fail

2pm, Sunday, 19 July 2015.

Notes to prospective investors, from the great cafe roadshow.
  • Total offers of interest (firm): steady around RMx50,000
  • Total offers of interest (firm+unfirm): declined by RM80,000, to RMx49,000
  • Potential investors met today: 3
  • Potential investors (firm+unfirm): 10-20
  • Potential investors approached: 1-2 hundred
  • Duration of project so far: 3-4 weeks
I got up at 6 a.m. today, to show a prospective investor the location for our proposed cafe. It sits by the crossing of two highways. One runs East to West, from Kuala Lumpur to the port of Klang; the other runs North to South, through a 25-kilometre strip of affluent Selangor neighbourhoods. The immediate neighbourhood is mature, its housing prices have quintupled over the past three decades. The square immediately across the highway from our shop is finally having its courtyard transformed into high-rise condominiums and offices, after twenty years; on the other side of our shop the transformation of another square is nearing completion. Our opportunity lies on a sleepy single-row of old businesses: Chinese coffee shops, tailors, serviced laundries, kedai runcits - we are flanked by a barber, what appears to be a film (!) photography shop and a hardware store. In terms of hipster cred, there's a small chance this is impregnable.

Further up the row, are 24-7 businesses: a massage parlour, a tow truck and auto-service centre, and four cybercafes which draw an e-sports crowd. I've always thought that KL lacks 24-7 Starbucks-like facilities, so hey - when the tenancy popped up, this seemed like a nice place to kick-off. I'm not counting on much business from foot traffic, but this is not quite a deadzone.

Third-Places and Their Conflation with Second-Places

(https://en.wikipedia.org/wiki/Third_place)

Our first investor of the day is visiting from the Far East. He has seen cafes in Paris that adopt a co-working charge-for-space business model, and he has been wondering about the feasibility of getting into such a business in Malaysia. We talk about the history of such attempts over the past five years in the Klang Valley. I tend towards the view that the market for space rentals is still a bit premature, but at EUR 4 (MYR 1718.22) per hour, for a free-flow of coffee, I think we might be able to work something out. If you are unfamiliar with this model, consider its poster-child: WeWork.
My own objective in this venture has been to operate infrastructure. Whether we ultimately charge customers by units of consumable food and beverage, or by units of space and time, the 24-7 coffee, couches, and Wi-Fi service market is (at this time) a blue ocean. However, it has negligible barriers to entry. We have a decent network of service-sector professionals and startup executives who would patronise such a business, but as soon as the model is shown to work (if ever it is shown to work) all the other 40 to 50 coffee shops and 100 to 200 eateries within a two kilometre radius could flip a switch and do the same - notwithstanding labour challenges. With regards to this opportunity, our intention is to field an early advance into the market.

Coffee Quality

So what of the wave that will follow? A number of our firm investors are confident that the acceleration in hipster cafes and quirky F&B restaurants over the past 24 months has already turned the sector bubblicious, even many months ago. There is no shortage of mediocre hipster food or coffee in our cafe's immediate vicinity.

Now I tend to think that marketing to hipsters is not a clear objective. Trends change, and mutating randomly is not a value proposition that I would invest in, myself. The stylistic elements of the establishment must target a timeless audience. Hipsters are a ready audience, during an economic boom, but their fast money is not steady money. What should our value proposition be?

To put it bluntly, the 25 to 30 cafes in the neighbourhood aiming to provide coffee that is "good enough," are not our competition. Degrees of quality in specialty coffee can be determined empirically - but perhaps only by about 1% of our local coffee drinkers: those who have both a particular degree of sensory sensitivity, and some experience in studying various qualities of coffee. We aim to offer every possible coffee option on the market to include all drinkers, but we must provide superior options for those who are willing to pay for it.

Two years ago when I helped a client to set up a specialty coffee shop, ahead of the recent wave, our empirical research indicated that there were only two or three cafes of sufficient quality that catered to the 1%. At this time, through the boom and partial bust of the quality bubble (much expenditure appears to be froth - with dumb money being funneled into unnecessary equipment and put on display in storefronts), our view is that there are currently only eight to ten cafes which deliver specialty coffee of a consistency that can be said to be tolerable.

We Believe in the 1%

Two of our potential investors backed out today. Their leader cited a summary contention that the proposed location of our cafe is uncompetitive. Based on that alone, I agree that this is the wrong deal for these investors, as our entire pitch for this project is crafted for the specific real estate opportunity that has presented itself by these highways and in between these squares.

One of the supporting contentions is that there are too many cafes and hipster restaurants nearby. A list was presented. My view is simply that,
  1. none of the cafes on that list have specialty coffee as a priority 
  2. none of them are open 24-7
  3. we're not interested in being hip/ster (offhand, I'd guess we're going to be erring away from Kinfolk, towards WSJ and Vogue)
(2.) is our main game in the mid-term, and (1.) is our main gimmick in the short term: we are attempting to compete with the top eight to ten quality coffee brewers in the Klang Valley.

Uncertainty and the Abyss

We can excel in this industry if we:
  • deliver excellent products, for that subset of our products which is labeled as "fine"
  • deliver consistent visual and aural iconography ("branding")
  • optimise every layer of our service architecture
  • relentlessly tune our cashflow
  • relentlessly innovate
And we will fail if we do not:
  • deliver superior customer service
  • deliver reliable infrastructure
All of these will be our operating foci, and with some luck if we fail, we will at least not-die.

(Also refer to A Cafe Marketing Strategy - http://sextechandmergers.blogspot.com/2015/07/cafe-marketing.html )

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